Housing scheme is a risk to taxpayers
The banks got into trouble with 100 per cent mortgages, so why does the government see such loans as the solution? Lenders can’t take an equity stake in homes that have no equity.
Yesterday’s blog explained why housing is a key driver of the economy and why a government is right to try to stabilise the market. But it warned against transferring risks from lenders and owners to the state, and now we have the details it is evident the state is a bad banker.
The idea is for people unable to pay the mortgage on a property that is falling in value to sell it to their council or a housing association at “full” value and rent it back. But why should these public-sector buyers bear all future capital losses? Any purchase ought to be at a discount but on homes already in negative equity, a cut-price deal is impossible.
The separate proposal for equity loans is similarly flawed. If would-be buyers cannot pay the asking price of a property, that will cut prices to affordable levels. But a council bridging their funding gap and taking equity in the property means the buyers pay above market price – and when the value reverts to its true level, the council’s equity (taxpayers’ money) is wiped out.
And if the owner defaults on the main mortgage, the council’s equity loan (whatever that means) disappears first – just as it evaporates as the housing market falls further.
As for the £300m scheme to give first-time buyers a five-year interest-free loan on new homes, that’s alright if it is the developers who provide the incentive – as many are doing already – but no state money should be involved.
If the builders simply cut their prices buyers might be able to afford the homes anyway. Instead developers are artificially keeping prices high so buyers can obtain mortgages. But if the buyer takes an 80 per cent loan on a price that ought to be 20 per cent lower, that is a 100 per cent loan - and we know where that leads.
If the government was taking equity stakes at the bottom of the market it might gain from the uplift – but if this was the bottom, government help would not be required. Instead it is using social policy to subsidise economic policy.
The redeeming point of this £1bn package is that the sums are too small to make much difference either to the housing market or the national finances. And the stamp duty waiver, unlike the equity aid, is a sensible measure even if it has limited effect.
But simply because there are no easy ways to stimulate the housing market is not an excuse for devising complex schemes that risk taxpayers’ money.
